Authorized Participants in ETFs: Role in Creation & Redemption

What is the role of an Authorized Participant (AP) in ETFs?

An Authorized Participant (AP) is a financial institution, typically a large bank or market maker, responsible for creating and redeeming ETF shares.

Their role helps maintain liquidity and ensures that the ETF's market price stays close to its Net Asset Value (NAV).

A. Creation

APs buy the underlying securities of an ETF and deliver them to the fund in exchange for newly created ETF shares.

B. Redemption 

APs return ETF shares to the fund and receive the underlying securities, reducing the ETF’s supply in the market.

By performing these actions, APs help prevent large price discrepancies between an ETF’s NAV and its trading price.

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